Insurance is a form of risk management primarily used to hedge against the risk of a contingent loss. The process of insuring something or someone presupposes the involvement of two parties ? the insurer and the insured. An insurer is a company selling the insurance to a person, who is the insured. The insurance rate is a factor which determines the amount, the premium, to be charged for a certain amount of insurance coverage. The event that gives rise to the loss that is subject to insurance should, at least in principle, take place at a known time, in a known place, and from a known cause. The best example is death of an insured on a life insurance policy. Fire, or automobile accidents, as well as worker injuries may all easily meet this criterion. A large number of insurance policies are provided for individual members of very large classes. Automobile insurance, for instance, covers about 175 million automobiles in the United States.
Thanks to the existence of a large number of homogeneous exposure units, insurers can benefit from the so-called "law of large numbers". This means that as the number of exposure units increases, so the actual results are more likely to become close to expected results. However, there are exceptions to this criterion. For example, some companies insure the life or health of actors, actresses and sports figures. Others cover events that are not frequent.
